Moody’s Suggest Banks To Become More Resilient Depite Debt

India’s banking sector has had its fair share of problems during the past few years but a recent report published by Moody’s Investors Service states that while bad debt will continue to rise, the banks are expected to grow even more resilient.

The report called ‘2016 Outlook Stable, But Risks Will Rise‘ looks at the banking industry in Asia-Pacific and focuses on 16 banking systems. The Asian banking system has experienced a mixture of slow gross domestic product (GDP) growth and significant pressure during the last 12 months. Countries like Hong Kong, Taiwan and Singapore which have smaller economies have found it a little easier to scale their GDP growth while countries like Vietnam and Indian which have larger banking systems have felt the pressure.

The Moody report suggest that due to the pressure experienced by these banking systems, they are more likely to be resilient in the coming years as they have coped with the pressure. The report has given a stable rating to 13 of these banking systems and only Mongolia, China and Hong Kong have received a negative rating. One of the reasons for the slow growth is due to the fact that banks are finding it extremely challenging to run a robust operation in Asia and China’s fluctuating economy has not helped to ease this pressure.

The report stated that most of the banks in Asia Pacific have experienced pressure on their asset quality but was able to stand firm due to their ability to absorb their losses and bounce back.

During the coming months the credit cycle is expected to change which will most likely result in a weakening of corporate metrics and could cause corporate loans to become a problem for banks to collect. The report stated that markets like China, Korea, India and Sri Lanka have an extremely high share of debt owed by corporate companies.

In a statement, Stephen Long, Managing Director for Moody’s Financial Institutions Group in Asia Pacific said

Bank ratings will remain broadly stable because of good capital levels as well as strong funding and liquidity profiles, as most systems are deposit funded, but the risk for ratings are skewed to the downside in the event of an economic slowdown in the region that is sharper than expected.

The report also predicted that profitability and asset quality would become worse in the coming year but overall the banking industry should be stable in 2016.